Regulation – still a hot topic which the Binary Option market is only just waking up to. Part 1

Binary Options are Fixed Return Options where the investor either wins the all or nothing fixed return payout if correct, or loses the investment stakes if incorrect. At first glance these would seem to be fixed odds betting products. In the United States certain forms of online gambling are strictly prohibited: these are bets on casino games, rolls of the dice, decks of cards, contests of others such as a horse race or sporting events, all the games you find at a standard casino and sports book. However speculating, investing, or betting on the financial markets (call it what you will) has always been allowed and remains fully permissible. The only proviso is that the company you deal with has to be appropriately licensed and regulated, answering to a higher authority than themselves. Binary Options are a form of derivative and are really the simplest way to invest in the markets where the trader just predicts higher or lower in 60 seconds, 5 minutes, up to the end of day or end of month. You win or lose and you know what is at stake. This is why investors love them, there is no leverage. This type of trading was not available before the internet made them possible and now there are a number of companies online offering Binary Options Trading to a world-wide public.

There have been recent reports across the industry surrounding Binary Option regulation. First there was ConSob, Italy’s regulator blocking a number of Binary providers from operating in the country. Consob reportedly believes that binary options could closely resemble gambling and some Binary Option firms are not in compliance with Italian financial rules. Bbinary.com (Banc de Binary), perceived by many as the largest company in the Binary Options industry has announced this week that it has registered with Consob. Licensed to offer Binary Trading as a financial product by the state of Cyprus which is a member of the European Union, Banc de Binary are therefore able to operate freely throughout the EU economic zone and are able to register and have now done so with both the Italian financial regulator and the FSA in London. However it should be noted that registration is not the same as licensing and Banc de Binary are licensed only in Cyprus but registered in other EU states which must recognize the Cyprus EU license.

Making matters more interesting, Japan's JFSA has stated that it is now also looking at its own Binary Options regulation release this summer. This has come about since the JFSA ordered brokers to cease trading there last year, and they have since been working on creating rules to regulate Binary Options platforms. It is interesting to note that the JFSA like Consob and the Italian Courts are also concerned that many Binary platforms out there while simply fixed odds betting on the outcome of the financial markets, are often marketed and put forth as something entirely different, which both these regulators would like to get a better handle on, so that the public are aware what it is they are buying. This might be the time when the industry is going to have to react as there could be a domino effect in how and what is allowed through regulation.

Speculating on the financial markets is nothing new. The traditional method of buying shares (betting that a stock will go up) or selling shares (betting that a stock will go down) have always been a permitted form of 'gambling' but nevertheless to be distinguished from a casino game type 'gambling'. Futures or options are unquestionably a form of gambling where the investor goes long or short without buying anything at all, but just betting on the future price of financial instruments. Gambling on the financial markets is unarguably a form of speculation (gambling) that is permitted in every country in the world.

The difference lies in that the market speculator (investor) is making a prediction based on facts, fundamentals, and knowledge whereas a game of poker, roll of the dice on a craps table, or sports bet in a casino is a totally different kind of gambling and cannot be called speculating. These forms of betting are not related to future predictions on the financial markets. These forms of gambling are what you will find in a standard casino and online casino gambling is illegal in many countries including the USA, Saudi Arabia, and many others. Whereas betting, gambling, speculating - call it what you will - when it is done on the stock markets this has been fully legal forever in the USA and across the world. Binary Options is a form of derivative and futures, options speculation although they are fixed odds options and therefore as fixed odds bet are completely legal in countries such as the USA. This much is clear.

It raises an interesting point of debate from a regulation perspective as there are a number of different jurisdictions that offer Binary Option platforms with proper licenses and regulations to operate according to the law. All offer different levels of licensing ranging from “banana republics” where it may be more the case of merely a 'paid for' piece of paper called a "license to operate" with little or no oversight by the state and therefore nil investor protection through to a full regulatory regime which has direct influence and authority on the Binary Options platforms which one would expect in the EU, USA, and Great Britain.

At the moment the main regulator for Binary Options providers has become Cyprus (CySec) with Japan apparently wishing to be next. Why Cyprus? Perhaps this is because Cyprus was from the outset where most providers were originally domiciled so Cyprus understandably sought to keep it that way. The immediate problem for Cyprus and the Binary platforms that have sought licensing there is obviously an economic one whereby public confidence has been hit by the country's willingness to surrender a percentage of a private individual’s cash savings. The second issue facing Cyprus is a historical bad reputation for corrupt government and bribery. This has obviously made Options Traders depositing in a Cyprus domiciled binary company nervous. Secondly there is this issue of categorising Binary Options which again could affect Cyprus and the CySec who have gone the financial instrument route, even although Binaries are not traded on an exchange but rather are traded directly against the platform with no liquidity, so that a Binary Option at bottom is simply an FRO (Fixed Return Option) against the platform operator itself at the pre-agreed rate of return, not a tradable instrument with liquidity that can be resold over an exchange. This fact once again highlights the dichotomy between a fixed odds betting regulator or a financial services regulator taking jurisdiction.

It seems clear that most countries including Italy are now looking at Binary Options not as an investment instrument but more as a fixed odds bet on the financial markets. Indeed one just has to look at Italy where this is already taking place and it is clear more hurdles are being put in front of Binary Option providers and how they market the product so as not to be misleading. Cyprus for instance decided to include the trading of Binary Options within the scope of the Investment Services and Related Activities Law of 2007-2009. Therefore if Binary Options are not seen as investments or financial instruments, the Binary Options platforms themselves may need to re-domicile in countries that can regulate them properly...

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